T&T is in a recession and the full-blown effects will be felt from early 2016, Central Bank Governor Jwala Rambarran said yesterday.
He told the Fifth Monetary Policy Forum, hosted by the Downtown Owners and Merchants Association at the Hyatt Regency in Port-of-Spain, that the country was facing austere economic circumstances and there was urgent need for fiscal policies to treat with the recession and maintain stability.
Rambarran said the duration of the recession depended on how swiftly the Government implemented fiscal policies.
He said T&T had a dismal first half of 2015, with depressed economic activity in the third quarter of the year.
“Similar weak economic conditions have prevailed so far into the fourth quarter of 2015. Four consecutive quarters of decline in real GDP in 2015 means T&T is now officially in a recession,” he said.
Rambarran said the recession was triggered by prolonged supply disruptions in the energy sector resulting in shortfalls in natural gas which in turn adversely affected output of LNG and petrochemicals.
“Lower energy prices also negatively impacted the domestic energy sector. This has already been reflected in job losses at some energy companies. The decision by Arcelor Mittal to idle its steel plant will not only affect energy output but also jobs,” he said.
The Central Bank governor said in recent years the non-energy sector had kept the economy “from veering off its already weak growth trajectory,” but now seemed to have lost its momentum so that weakness has crept into key sectors, including distribution and construction.
He recommended that the Finance Ministry work with the Central Bank to come up with the necessary monetary and fiscal policies.
“We have no choice. We can and should work together to ensure we get the policies right for the country’s recovery. We will all be double damned if spite, vindictiveness and ego keep us from working together to help our country,” he warned
Rambarran said the Central Bank expected the economy to contract by 1.5 per cent, in a reversal from the sluggish growth of one per cent recorded last year. The energy sector is expected to contract by more than three per cent and activity in the non-energy sector is expected to be flat.
Noticeable signs of the recession would start to set in next year when businesses began to cut back on investments, consumers held back on spending and bank loans became fewer, he said.
T&T last experienced a recession in 2009 and it lasted a year. The country experienced a severe recession for seven consecutive years from 1983 to 1989. (See pages A12 & A15)
Responding to his detractors who criticised him for increasing the repo rate in a short space of time, Rambarran said the Central Bank was increasing the rate gradually to prepare the economy for occurrences in global markets such as a rate hike by the US Federal Reserve.
“The actions we have been taking in respect of interest rates are meant to help insulate the economy so it provides a level of protection and tries to prevent things from worsening. The Government then has to step in on the fiscal side and provide another level of stability to the economy,” he explained
Noting that the US Federal Reserve can increase its interest rate at any time, Rambarran said the Central Bank had been gradually increasing its policy interest rate since September 2014.
At its December meeting, the Central Bank’s Monetary Policy Committee (MPC) agreed to raise the repo rate by 25 basis points to 4 3/4 per cent. Rambarran said although this was the eighth consecutive hike, the MPC viewed that stance as accommodative.
What is a recession?
It is a period of declining economic activity throughout an economy, generally defined as a contraction in the overall output that lasts for more than six months.
The 2015 recession in T&T, which started at the beginning of the year, has been caused by a reduction in the country’s production of natural gas and the sharp decline in energy revenues because of the collapse of the export prices for LNG, oil and petrochemicals such as ammonia, urea, methanol and iron and steel.
The slowdown of the energy sector has infected the non-energy sector.
The markers of a recession include increased unemployment, stagnant or declining wages, a reduction in retail trade and a slowdown in production in manufacturing.
Workers in the energy sector are already feeling the pain of the recession:
• hundreds of workers were thrown on the breadline when ArcelorMittal mothballed its iron and steel plant on the Point Lisas Industrial Estate;
• scores of workers at state-owned NGC are facing Christmas without their traditional bonuses and increments;
And the Government has ordered ministries, departments and state enterprises not to spend as lavishly on Christmas parties this year as in previous years
If a household suffers an income freeze—or worse yet has a breadwinner who is laid off—the rationale response is to spend less by cutting out luxuries, selling assets, drawing down on savings and borrowing money.
Workers not directly affected by job cuts also tend to reduce their spending as they fear that they may be next. As T&T discovered in the 1980s, less spending by the population means a reduction in sales by retailers, which translates into job losses in the retail sector as well.
Eventually, as the population spends less, the government collects less taxes, especially the Value-Added Tax, which means that recessions almost always lead to a reduction in a government’s tax collection.